Business Combination Flashcards
What is good will?
Difference between COI and FVNA
How is good will presented in the books?
It is presented in the Asset Section
How do you compute for goodwill/GBP?
COI
(FVNA)
=
GW/GBP
What is gain on bargain purchase?
A negative amount when deducting FVNA from COI
How is gain on bargain purchase presented in the books?
INCOME
(Income Statement)
Types of Business Combination schemes?
*Structure
*Method
*Accounting Method used
What are the types of business combination as to structure?
*Horizontal
*Vertical
*Conglomerate
*Circular
——
H: Same industry
V: Same Industry, different levels
Co: Unrelated Industries
Ci: Diversified but with no drastic change like CONGLOMERATE
What are the types of business combination as to legal pov?
*Statutory Merger
*Statutory Consolidation
*Stock Acquisition
What are the 3 layers ownership to gain influence?
P-stock C-stock
<20% @FV @FV
20-50% @FV Associate
>50% @FV Subsidiary
——–
Associate:
Significant power to influence and participate
Subsidiary:
Power to control
(PERA)
Power
Exposure
Rights to valuable returns
Ability to use your power
What is non-controlling interest?
These are interests that is not purchased by an acquirer.
(Remaining stocks in the hands of different investors)
What is preferred shares?
A type of share that is sold without the property of power to influence and control.
Who is acquirer?
Buyer
As to what extent is the meaurement period in the business combination?
1 year after the acquisition date
What is the table to always remember in business combination?
Total Parent NCI
COI xx
FVNA (xx)
————————————–
GW/GBP XX
What is COI?
It is the total cost given up by the acquirer to obtain control and influence in from the Acquiree
What are the matters to consider under the COI?
*Cash
*Liabilities Assumed
*Equity Instruments
*Non-monetary assets
*Contingent consideration
*Share-based payments
*NCI
*PHI
Finder’s fee, Professional fees, General Administrative costs, accounting and legal fees are example of?
Acquisition-related costs
How do you recognize costs to issue equity shares?
A deduction to share premium, if share premium is insufficient, then deduct it to retained earnings
How are acquisition-related costs recognized?
Expensed
Hierarchy valuation of NCI
*Explicit
*Assumed
*Proportionate FV (only to stock acquisition)
How is control premium accounted?
Share Premium:
FV is Higher than BV
Compute for Fair Value of Net Assets
Identifiable assets @FV
(Identifiable liabilities @FV)
———————————
FVNA
Explain Previously Held Interest (PHI)
Previously bought interest of the holder before purchasing another set of interests
Share-for-share exchanges
It is a business combination through exchange of equity interests.
Consideration transferred is measured at FV either from “ee” or “er” whichever is more reliably determinable.
How do you compute for number of shares issued under the share for share exchanges?
Determine the increase in the share capital
Divide the Par Value per share
How to compute fair value per share?
Determine the increase in both Share Capital and Share premium, total it
Divide the number of shares issued
Step acquisition or Business Combination in stages
When an investor aacquires additional shares from an investee
The acquisition resulted to the investor gaining control over the investee
Where should the Goodwill/GBP be recorded under the asset acquisition?
Books of acquirer
Where should the Goodwill/GBP be recorded under stock acquisition?
Consolidated books
How are adjustment in provisional amounts accounted?
It is accounted retrospectively
Are goodwill apart from the business combination be recognized as an asset?
No
How to account subsequent expenditures in maintaining goodwill?
Expensed immediately
Are Goodwill amotized?
NO, it is tested for impairment at least annually
These are the smallest identifiable group of assets that are largely independent of the cash inflows from the other assets or group of assets
Cash Generating Units (CGU)
Is goodwill identifiable?
No, it is not identifiable therefore, it cannot be measured by impairment alone, only in conjunction with groups of assets that generate independent cash inflows (CGU)
CGU is impaired when___
The recoverable amount is LESS than the carrying amount (including the allocated goodwill)
Who initiated the due diligence audit?
Acquirer
Due diligence audits are commonly performed by ___
CPAs and external firms
Methods of estimating goodwill (2)
- Indirect Valuation
- Direct Valuation
(UNDER DIRECT VALUATION)
-Excess Earnings
Normalized earnings are computed as:
Total earnings from the past years (PLUS/MINUS) the appropriation if any = Normalized Earnings
(UNDER DIRECT VALUATION)
-Excess Earnings
Average earnings are computed as:
Normalized earnings (DIVIDE) past years = Average earnings
(UNDER DIRECT VALUATION)
-Excess Earnings
Normal earnings are compputed as:
FV of net assets (TIMES) Normal rate of return (DIVIDE) past years = Normal Earnings
(UNDER DIRECT VALUATION)
-Excess Earnings
Excess earnings are computed as:
Difference between the Average and the normal earnings = Excess earnings
(UNDER DIRECT VALUATION)
-Excess Earnings
Goodwill is computed as:
Excess earnings (TIMES) Duration of excess earnings in years = Goodwill
Full Goodwill Method indicates a share of ____ in the goodwill
Non-controlling interest
Partial/proportionate method in the goodwill has ____
NO non-controlling interest share in the goodwill.
Gain on Bargain Purchase is recognized in?
Profit or Loss
What is directly attributable costs?
These are professional fees paid (legal advisors, accountants, brokerage) to effect the combination.
Directly attributable costs are ___ immediately.
Expensed
Indirect acquisition costs are ___?
General and administrative costs (costs that cannot be directly attributed to the particular costs)
expensed
Costs of issuing securities is recognized as a debit to ____?
APIC/Share premium Account
Identifiable tangible assets are recognized if it passes these 2 steps:
Probability test (if future inflows of economic benefit is probable)
Reliability test (if its FV can be measured reliably)
Identifiable intangible assets are recognized even if:
There is no probable future inflow of economic benefit
Are intangible assets part of goodwill?
NO. Under PAS 38, intangible assets are separate from goodwill and has a separate line item under INTANGIBLE ASSETS in the financial statements
Are liabilities recognized?
Yes, only if there is probable outflow of cashflow to settle the obligation. (Except: Contingent Liability, it is always recognized if it can be measured reliably)
